The Hindenburg Omen is a term coined by Jim Miekka to describe a series of stock market events that will signal a serious adjustment (downturn). While Miekka is an amazingly talented man he has never worked on Wall Street, does not hold any financial degrees and his theory to predict downturns, the Hindenburg Omen, holds true only 25% of the time.
So why is his theory getting so much press? Well, for one thing its name! The word omen alone sounds ominous and when you put it behind the word Hindenburg it takes on an apocalyptic tone. Hindenburg was the name of the German zeppelin that caught fire and burned while its docking was being filmed. The horrific sight of the Hindenburg burning cut short the lighter then air travel industry.
Stock market watchers are always looking for the secret formula that will tell them when to buy or sell but the only certainty is that if someone did find the secret they would keep it to themselves and quietly get rich. With the economy looking grim and the stock market behaving erratically (or perhaps it only appears so due to being watched so closely and over analyzed) anything that will give even a hint of what is to come is seized upon.
Miekka came up with the indicator by observing the 52 week stock levels and moving averages from the New York Stock Exchange. According to Miekka a 52 week high coupled with a 52 week low of stocks traded on the exchange each of which total at least 2.5% of trading stocks, a 10 week NYSE moving average that is on the rise and the McClellan Oscillator (a measure of market breadth) being negative is a formula for a soon to be stock market crash if they all occur on the same day.
Miekka’s Omen was preceded by, and may have been based on, Norman Fosback’s High Low Logic Index created in the 1970’s. According to Fosback a large number of new highs and new lows occurring simultaneously is unusual and “….indicates that the market is undergoing a period of extreme divergence. … Such divergence is not usually conducive to future rising stock prices.”
The significant difference between the Hindenburg Omen and Fosback’s High Low Logic Index is the percentage of highs and lows that must occur at the same time. In Fosback’s textbook, Stock Market Logic, he used 5% as the necessary lesser of the new 52 week highs and new 52 week lows traded on the NYSE. Miekka’s Hindenburg Omen occurs when only 2.5% of 52 week highs and lows occur.
This difference, 5% verses 2.5%, likely explains why the Omen is correct in only 25 % of the time and why it occurs more often then Fosback’s indicator. Miekka concedes that his Hindenburg Omen carries no guarantee and “….wonders how the indicator will work in the future with all this attention.”
The Omen occurred three times in August and according to Miekka this increases both the likely hood of a correction and its severity. “It’s like a funnel cloud,” Mr. Miekka says. “You don’t get a storm with every funnel cloud, but now that we’re seeing several funnel clouds, I definitely think I want to stay in the storm cellar.”
Only time will tell is more people will join him in the cellar or whether there will be the ‘cyclone’ he is predicting.
Sources:
http://www.marketwatch.com/story/a-statistical-take-on-the-hindenburg-omen-2010-08-24
http://online.wsj.com/article/SB10001424052748704540904575452013459211330.html